country report saudi arabia a look into

8/18/2019 Country Report Saudi Arabia a Look Into

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Country Report: Saudi Arabia

A Look into the World’s Largest Oil Producer

MGT 4227: International BusinessCity University of Hong Kong

Name : Anis Syazwani BasriStudent ID : 40044920Lecturer : Dr. KIM, Kwang-Ho Date : 21st November 2013


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Overview

Saudi Arabia has always been an interesting country in the global economy. With oil

and gas as their key sector and the land that pioneer one of the world’s most religion

devotee, Islam, Saudi Arabia seems to offer a lot of things to write about. Therefore, we

thought Saudi Arabia could be valuable use for our research. We chose Saudi Arabia

because we were interested in the oil industry and its global impact. We believe it is

one of the engines in the international business as most companies rely on oil prices for

their product pricing. Moreover, as the industry is often mentioned in the class we feel

that it is relevant for us to research deep in this industry to know more about this world’s

largest oil producer.

Furthermore, we have chosen Saudi Arabia because we did not know a lot about

companies in the Middle East. We knew they were famous for their oil but did not know

much about their way of doing business. We are also a team with six people from

different cultures and countries which mainly located in US, Europe and East Asia.

Since none of our members are from Middle East, we feel intrigued to do a research

about a country and a region that none of us was familiar with as we believe we can

learn about the other country’s prospect from our members.

Our aim is to give a solid recommendation about doing business in Saudi Arabia. First,

we will introduce Saudi Arabia by providing some background information about the

country. Second, we will provide a Political, Economic, Social, Technological,

Environmental, and Legal analysis of the country. We will use this analysis as a key tool

to measure the likeliness to do business in Saudi Arabia and whether the business will

fit the country. Afterwards, we are going specific into the oil industry by measuring the

global competitiveness of the industry, using Porter´s Diamond Framework. We will

discuss the context of the firm’s strategy and rivalry, in addition to the demand

conditions, the factor conditions, and the related supporting Industry. Additionally, we

will provide a SWOT analysis of the oil and gas industry in Saudi Arabia. This will help

us to provide a solid recommendation for doing business in Saudi Arabia, in particular

the oil industry. Finally, we will end our report with a conclusion of our research.


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List of Contents

1. Overview…………………………………. 2

2. Introduction………………………………. 4

3. PESTEL Analysis………………………… 4

3.1 Politic

3.2 Economic

3.3 Social

3.4 Technology

3.5 Environment

3.6 Legal

4. Competitiveness of Oil Industry………….. 8

4.1 Firm Strategy and Rivalry

4.2 Demand Condition

4.3 Factor (Input) Condition

4.4 Supporting and Related Industry

5. SWOT Analysis…………………………… 14

5.1 Strengths

5.2 Weaknesses

5.3 Opportunities

5.4 Threats

6. Suggestions………………………………… 17

6.1 Suggestions for Improving the Oil Industry in Saudi Arabia 6.2 Suggestions for New Firms Entering Saudi Arabia

7. Conclusion………………………………... 19

8. References………………………………… 20


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2. Introduction

Saudi Arabia, officially known as the Kingdom of Saudi

Arabia, is the largest Arab state in Western Asia. It is

bordered by Jordan and Iraq on the north, Kuwait, Qatar,

Bahrain and the United Arab Emirates on the east, Omen

and Yemen on the south. The country’s land mass is

approximately 2.25 million square kilometers with an

estimated population of 27 million people. The official

language is Arabic while English language is getting more

popular through media. As for unspoken language, physical

contacts are not allowed between men and but they are

very fond with the same gender. 97% of the population is Muslim. Saudi Arabia’s

geography is mostly dominated by the Arabian Desert with almost no rivers or lakes

and has very little fertile land. Saudi Arabia is also nicknamed as “The Land of the Two

Holy Mosques” as it is home to both Mecca and Medina, which are the two holiest

places in Islam.

3. PESTEL Analysis

3.1 Political

The Kingdom of Saudi Arabia, which was founded in 1932 by Abdul-Aziz bin Abd

al-Rahman Al Saud (Ibn Saud), is a hereditary monarchy. The King governs through a

Council of Ministers, on which he serves as President. The King is also the prime minister,

chief of state, the head of government, and commander in chief of the military of Saudi

Arabia. The Kingdom of Saudi Arabia is divided into 13 provinces, each of which is administered by a

provincial governor appointed by the King. Provinces are subdivided into governorates,

districts and centers. King Abdullah bin Abdulaziz Al Saud has been the ruler since

2005. The King's Cabinet, or Council of Ministers, is appointed by the King every four

years, and includes many family members. There are 22 government ministries that are

part of the Cabinet. The monarchy is hereditary, so there are no elections for the role.

There are no political parties in Saudi Arabia.


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3.2 Economical

Saudi Arabia was an economy based on subsistence agriculture by a population

that was largely nomadic until the discovery of oil in the 1930s. Since the discovery of

oil in 1938 has grown to be among the wealthiest nations. Saudi Arabia possesses 18%

of the world's petroleum reserves, ranks as the largest exporter of petroleum, plays

major role in OPEC.

Oil revenues account for about 90 percent of export earnings and about 80 percent of

government revenues. Capitalist Economy. GDP (PPP) $622 Billion and Growth 3.7%.

40% of GDP from private sector. As part of its eff ort to attract foreign investment and diversify the

economy, Saudi Arabia acceded to the WTO in 2005 after many years of negotiations. The

Kingdom of Saudi Arabia has been rated as the 13th most economically competitive

country in the world, according to the International Finance Corporation (IFC)-World

Bank annual "Doing Business" report issued for 2010. The report highlighted the rapid

rate of economic growth among Middle Eastern countries, specifically Saudi Arabia, as

a result of economic sector reform. Saudi Arabia is sitting on a land with an abundant

wealth of oil. It has the world’s second largest oil reserve and oil accounts for more

than 90% of its export’s earnings and 70% of the government’s revenue. The oil

industry accounts for 45% of Saudi Arabia’s GDP compared to the 40% from its private

sector. The GDP per capita is an estimated $24 000 USD which was helped by theincrease in the oil prices since 2000.

3.3 Social

The Saudi Arabia society and culture is dominated by the values of Islam and it

is a culturally rich country. Islam is the dominant religion of the Saudi Arabian people

and about 95% of them are Sunni Muslims. Adherence to Islamic values and maintenance of

social stability in the context of rapid economic change has been consistent goals of Saudi Arabia'sdevelopment plans. The Saudi Arabian society and adherence to Islam have been the

major deterrents of the social problems in the country.

Social problems are effectively controlled in Saudi Arabia because the justice

system is based on the strict principles of Sharia, which clearly specifies the

punishment for various criminal activities. The Sharia-prescribed punishments always


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have a physical aspect and when a physical punishment is prescribed, it is generally

carried out in a public place, like a mosque.

The Geert Hofstede analysis for Saudi Arabia is almost identical to other Arab

countries where their Muslim faith plays a large role in people’s lives. Large power

distance and uncertainty avoidance are the predominant characteristics for this region.

This indicates that it is expected and accepted that leaders separate themselves from

the group and issue complete and specific directives.

Large Power Distance and Uncertainty Avoidance are predominant Hofstede

Dimension characteristics. These societies are more likely to follow a caste system that

does not allow significant upward mobility of its citizens. They are also highly rule-oriented with laws, rules, regulations, and controls in order to reduce the amount of

uncertainty, while inequalities of power and wealth have been allowed to grow within

the society. It creates a situation where leaders have virtually ultimate power and

authority, and the rules, laws and regulations developed by those in power reinforce

their own leadership and control. The high Power Distance (PDI) ranking is indicative of

a high level of inequality of power and wealth within the society. The high Uncertainty

Avoidance Index (UAI) ranking of 68 indicates the society’s low level of tolerance for

uncertainty. In an effort to minimize or reduce this level of uncertainty, strict rules, laws,

policies, and regulations are adopted and implemented. The ultimate goal of these

populations is to control everything in order to eliminate or avoid the unexpected. The

Masculinity index (MAS), the third highest Hofstede Dimension is 52.This would indicate

that while women in the Arab World are limited in their rights, it may be due more to

0

10

20

30

4050

60

70

80

90

100

Uncertainty

avoidance

Masculinity Power

Distance

Individualism

Hofstede Analysis for Saudi Arabia

Hofstede


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Muslim religion rather than a cultural paradigm. The lowest Hofstede Dimension is the

Individualism (IDV) ranking at 38. This translates into a Collectivist society as compared

to Individualist culture and is manifested in a close long-term commitment to the

member 'group', that being a family, extended family, or extended relationships. Loyalty

in a collectivist culture is paramount, and over-rides most other societal rules.

3.4 Technological

Although Saudi Arabia just adopted the Internet in 1999, the government has

made advances to improve science and technology starting in 2000. In addition to its

research and development spending, the Saudi Arabian government implemented The

New Science and Technology Policy to develop a more knowledge-based country. As

a result of the government’s new policy, the country’s economy shifted to become lessreliant on the oil market. Moreover, companies and services previously under

government jurisdiction are becoming privatized, which will promote further boosts in

research and development.

3.5 Environmental

Saudi Arabia has only recently applied environmental regulations after the

country’s rapid industrialization. Through Saudi Arabia’s induction into the InternationalConvention on Biological Diversity, the government reinforces national environmental

protection. Saudi Arabia’s Meteorology and Environmental Protection Administration is

responsible for regulating pollution and other environmental issues. In addition to the

MEPA, the General Environmental Regulation is the government-approved association

aimed to prohibit and action that may be detrimental to the environment. Furthermore,

the GER ensures that preventative measures, including conducting assessments of

company projects to evaluate possible damage to the environment.

3.6 Legal

The King of Saudi Arabia maintains control of its traditional judicial system

without any separation of powers. Saudi Arabia’s legal system is founded on Sharia,

which is Islamic law that stems from the Qu’ran and Sunnah, or Muhammad’s traditions.


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In 2010, Sharia was put into codes and regulations to cover modern issues such as

intellectual property and corporate law. In 1932, King Abdul Aziz fostered the court

system. The system is comprised of general and summary Sharia courts along with

administrators to regulate and enforce the criminal procedure code, which was set up in

2001. Although the court system maintains codes, little progress has been made to

restructure the judicial system.

Saudi Arabia’s legal system follows the Islamic Sharia which is derived from

the teachings of the Quran and the Sunnah. They are both declared to be on the

country’s constitution, however, no modern constitution has ever been written. Since

they use an absolute monarchy political system, they remain the only Arab nation to

have never had a national election take place since its creation. They do not permit

political parties or national election and remain an authoritarian state. In 2011, King

Abdullah announced that women will have the right to stand and vote in future local

elections and be full members of the advisory Shura Council.

4. The Competitiveness of Saudi Arabian Petroleum Industry

This part is going to look at what they did to achieve this state of competitiveness and

how to further improve in the global market. The research of the competitiveness of the

Saudi Arabia oil industry will be done by using Michael Porter’s Diamond model. This

model consists of four elements which are the context of firm strategy and rivalry,

demand condition, factor/input condition and related and supporting industry.

4.1 Firm Strategy and Rivalry

The first factor of the Diamond Model is in the context of firm strategy and rivalry.

This factor covers the condition of how companies are created, organized, managed

and governed, as well as the nature of domestic and international rivalry.

Saudi Arabia has proven their competitiveness in the global oil market by being

the largest producer of oil in the world. Their strategy is to centralize all of the petroleum

production in their country by establishing a national petroleum company called Saudi

Aramco. Saudi Aramco is a fully integrated state-owned company built in 1933 which in


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charge of exploration, production, refining, distribution, shipping and marketing of the oil

and gas. Saudi Aramco also holds 100% control over the production from any company

in Saudi Arabia. This has allow the government to keep track of the production hence

ensure efficiency by using the company as their medium.

Another factor that has improved the competitiveness of Saudi Aramco and

Saudi Arabia’s oil industry is by joining OPEC. They have become more efficient after

entering OPEC where their production increases every year taking that OPEC goal is to

focus on high revenue instead of the supply of oil. In order to achieve the profit

targeted, Saudi Aramco has to produce the oil based on the quota and based on the

price basket (demand and supply system) which allows them to reap more profit than

simply based on the amount of oil they are producing.

Another factor that determines the competitiveness is competition. Vigorous local

and global competition of the firm can help boost efficiency and hence improve

competitiveness. Currently, there are ten oil and gas companies operating in Saudi

Arabia in which 6 out 10 are owned by foreign companies. The companies are Chevron

Ltd, Shell, BP, Arabian American Oil Company, Exxon and Conoco. These leading oil

companies have benefited Saudi Aramco as they bring foreign technology and also skill

transfer as well as financial injection to the Arabian government. As for the local

competition, Saudi Arabia has not much local rivalry as Saudi Aramco is the main

national petroleum company.

4.2 Demand Conditions

According to Michael E. Porter in the Competitive Advantage of Nations, “Home-

demand conditions help build competitive advantage when a particular industry

segment is larger or more visible in the domestic market than in foreign markets”.

Source: Central Intelligence Agency website, 2011

Crude oil - production: 11.15 million bbl/day

country comparison to the world :

2

Refined petroleum

products - consumption:

2.817 mill ion bbl/day

country comparison to the world :

8

https://www.cia.gov/library/publications/the-world-factbook/docs/notesanddefs.html#2241https://www.cia.gov/library/publications/the-world-factbook/docs/notesanddefs.html#2241https://www.cia.gov/library/publications/the-world-factbook/docs/notesanddefs.html#2241https://www.cia.gov/library/publications/the-world-factbook/rankorder/2241rank.html?countryName=Saudi%20Arabia&countryCode=sa&regionCode=mde&rank=2#sahttps://www.cia.gov/library/publications/the-world-factbook/docs/notesanddefs.html#2246https://www.cia.gov/library/publications/the-world-factbook/docs/notesanddefs.html#2246https://www.cia.gov/library/publications/the-world-factbook/docs/notesanddefs.html#2246https://www.cia.gov/library/publications/the-world-factbook/docs/notesanddefs.html#2246https://www.cia.gov/library/publications/the-world-factbook/rankorder/2246rank.html?countryName=Saudi%20Arabia&countryCode=sa&regionCode=mde&rank=8#sahttps://www.cia.gov/library/publications/the-world-factbook/rankorder/2246rank.html?countryName=Saudi%20Arabia&countryCode=sa&regionCode=mde&rank=8#sahttps://www.cia.gov/library/publications/the-world-factbook/docs/notesanddefs.html#2246https://www.cia.gov/library/publications/the-world-factbook/docs/notesanddefs.html#2246https://www.cia.gov/library/publications/the-world-factbook/rankorder/2241rank.html?countryName=Saudi%20Arabia&countryCode=sa&regionCode=mde&rank=2#sahttps://www.cia.gov/library/publications/the-world-factbook/docs/notesanddefs.html#2241


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Based on the table above, we can say that the Saudi Arabian consume 25.26%

of the petroleum they produced which portrays relatively high sophistication of local

customers towards this product. The statement by the Central Intelligence Agency

below summarizes the local demand condition of the oil in Saudi Arabia.

“We analyze the rapid growth of Saudi

Arabia’s domestic oil consumption, a

nine-fold increase in 40 years, to nearly 3 million barrels per day, about one-fourth of

production. Such rapid growth in consumption – 5.7% annually, which is 37% faster

than its income growth of 4.2% – will challenge Saudi

Arabia’s abilit y to increase its oil

exports, which are relied upon in long-term world oil projections by the International

Energy Agency (IEA), US Department of Energy (DOE) and British Petroleum (BP).

However, these institutions assume unprecedented slowdowns in Saudi oil

consumption – from 5.7% annual growth historically to less than 2% in the future –

allowing them to project increases in Saudi oil exports.”

Based on the table below, we can see that the world oil demand is projected to

increase. It can be seen in the table that the demand increases by over 20 mb/day for

the period 2010-2035. This will promise Saudi Aramco a further bright future if the

company with the help of Saudi Arabian government can maintain their current

efficiency as well as competitiveness. However, as the future is still vulnerable due to

economic situation, environmental change and other unpredictable happening, Saudi

Aramco and Saudi Arabia should also remain focus on the short term projection of oil

demand without being complacent of the increasing in the long term oil demand.

World oil demand outlook in the Reference Case (mb/d)

Source: World Oil Outlook, OPEC, 2012


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4.3 Factor (Input) Conditions

In order for Saudi Arabia oil industry to improve its global competitiveness, it

must also have access to high quality business inputs. These quality inputs are skilled

human resources, high capital availability, superior physical infrastructure and efficient

administration.

One of the efforts given by the government to provide more skilled labours in this

field is by opening King Fahd University of Petroleum and Minerals which was

established on 23 September 1963. It is located in Dhahran between the headquarters

of the Saudi Arabian oil company, Saudi Aramco and the Dhahran Air Base. Saudi

Aramco has definitely benefitted from the establishment of this university as due to the

same geographical location, they get to train the students from the early stage and

produce the skilled worker. This university is also the most selective university in Saudi

Arabia with only 15% of acceptance rate which will also attract the best brain power in

the region.

Another method to improve competitiveness is through financial capital which is

investment. The investment can come from two sources which are the government and

foreign. According to Central Intelligence Agency, Saudi Arabia has put in 21.1% of

their Gross Domestic Product into the investment which ranks 82th place in world. This

result shows that the government needs to invest more in Saudi Arabia to improve their

competitiveness.

Foreign Direct Investment (FDI) for the oil industry is also not looking good in

Saudi Arabia. Based on the table below, we can see that only 2.4% of the total FDI

inflow goes to the oil and gas industry. This is probably due the market saturation or thelow confidence of the foreign investor in the Saudi Arabia’s oil industry.

http://en.wikipedia.org/wiki/Dhahranhttp://en.wikipedia.org/wiki/Saudi_Aramcohttp://en.wikipedia.org/wiki/Dhahran_International_Airporthttp://en.wikipedia.org/wiki/Dhahran_International_Airporthttp://en.wikipedia.org/wiki/Saudi_Aramcohttp://en.wikipedia.org/wiki/Dhahran


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Source: Saudi Arabian General Investment Authority (SAGIA), 2011

Other than that, the government has also planned for a more superior

infrastructure with the creation of Dhahran Techno-Valley. It is envisioned to be Middle

East’s most prestigious, industrial research and development (R&D) and technology

nucleus and also provides development, production, and marketing support services for

innovation that originates from academic research, but under business environment.

4.4 Related and Supporting Industries

Another factor to improve the global competition is through the development of

related and supporting industries, clusters; a critical mass of firms and institutions in

each field to harness efficiencies and externalities across related entities (Porter, 2010).

Saudi Arabia is located at the largest oil field cluster in the world. Looking at the map

below, we can see that there are a mass of oil production around the Persian Gulf area.


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Source: US Energy Information Administrative

This is a significant advantage to the home-based related and supporting

industries as access to components and machineries can be gained in a close working

distance. Suppliers and end users can take advantage of short line communication,

quick and constant flow of information, and continuous exchange of ideas and

innovations

As Saudi Arabia is using strategic planning to save their oil reserve by importing

gasoline from foreign countries, Saudi Arabia had focus more on the other petroleum

by-end product. One of the major related industries is the petrochemical industry in

which Saudi Arabia has the National Petrochemical Industry Company to oversee the

whole petrochemical production. The Saudi petrochemical industry is mostly managed

by joint ventures between Saudi government firms and major international firms which

has given access to the worldwide product marketing. Major international partners

include ExxonMobil Corporation, Royal Dutch Shell PLC, Mitsubishi Corporation,

Hoechst Celanese Corporation, Nestle Oil Corporation and Chevron Phillips.


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5. SWOT Analysis of Oil and Gas Industry

Saudi Arabia is a leading nation in the world’s oil and gas industry with the strongest oil

and gas reserves and production capacity, and is also actively forming joint ventures

with foreign oil companies for expansion. However, the keen competitions in the

industry worldwide and the risks of being attacked by terrorists could impact their future

development.

Strengths

- Strong Oil and Gas Reserves

- Large Refining and

Petrochemicals Base

Weaknesses

- Lack of Worldwide Retailing

Network

- Concentration of Reserves

Opportunities

- Foreign JVs for Expansion

- Development of the Rabigh II

Project

Threats

- Risk of Terrorist Attacks on

Energy Facilities

- New Competition

5.1 Strengths

Strong Oil and Gas Reserves

Saudi Arabia is very strong in oil and gas reserves. They have significant untapped

natural gas reserves (8,200bcm) and the world’s largest proven reserves of crude oil

(265bn bbl.). Being the world’s largest oil producer in areas of reserves and production,

and a leading nation in OPEC (Organization of the Petroleum Exporting Countries),

Saudi Arabia plays an important role in the global energy market.

Saudi Aramco, the state-owned oil monopoly of Saudi Arabia, which is also the biggest

oil output producer among the top global oil companies, is expected to uncover more

resources in existing fields and unexplored areas, as there is new exploration in launch

with improved oil extraction techniques that can boost field recovery rates to a higher

extent.


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Large Refining and Petrochemicals Base

Saudi Arabia has four domestic refineries operated by Saudi Aramco, which had a

combined crude distillation capacity of around 4.02mn b/d at the end of August 2012.

Saudi Aramco also has joint-venture refineries domestically and many refining assets in

other countries in operation or under planning. Recently, Saudi Arabia expands its

refinery developments with a state-run Chinese refiner Sinopec through a joint venture

in the construction of a new 400,000 b/d refinery at the Red Sea of Yanbu, enhancing

its growing position in world energy market.

5.2 Weaknesses

Lack of Worldwide Retailing Network

The main oil company Saudi Aramco in Saudi Arabia does not have a worldwide

retailing network for its oil output, but has to rely on other intermediaries worldwide to

reach their customers, thus their profit margin is worse off. In comparison with other

leading global oil companies, such as Royal Dutch Shell and Exxon Mobil, who have

their own network of gas stations, Saudi Aramco is less competitive in the marketing

segment.

Concentration of ReservesSaudi Arabia has more than one hundred producing or discovered fields, but the oil

reserves in Saudi Arabia are mainly from the onshore Ghawar oil field and the offshore

Safaniya fields, with the Ghawar oil field alone accounts for at least one-third of the total

reserves. Saudi Arabia’s huge dependence on these two oilfields in oil output

production significantly increases the risk of doing business in Saudi Arabia’s oil

industry in case of production disruption in these fields.

5.3 Opportunities

Foreign JVs for Expansion

Saudi Arabia is enhancing its market presence worldwide by actively forming joint

ventures with foreign oil companies. In Nov 2011, Saudi Aramco and the Dow Chemical


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Company agreed on the formation of a JV to build the world’s largest chemical facilities.

In 2012, Saudi Aramco formed a JV with Sinopec for the development of Yanbu

refinery, and is planning on an integrated refining and petrochemical project in

Indonesia with its state-owned oil and gas company PT Pertamina to produce high-

quality refined petroleum.

Development of the Rabigh II Project

In the Petro Rabigh project in 2006, Saudi Aramco developed a world-class integrated

refinery and petrochemical complexes in Saudi Arabia. In 2009, the company, together

with its partner Sumitomo Chemical, has started the Rabigh II Project to further expand

the project of Petro Rabigh.

Rabigh II Project will include a new aromatics complex and an expanded facility to

process 30 million standard cubic feet per day of ethane and 3 million tons per year of

naphtha as raw material to produce a variety of high value-added petrochemical

products. The total project investment is projected to reach approximately $7 billion,

and is expected to begin its operations in 2016. On completion, the project would

increase the production capacity of Saudi Aramco and help in improving its profit

margins.

5.4 Threats

Risk of Terrorist Attacks on Energy Facilities

Saudi Arabia is subject to the risk of being attacked by terrorists. An unsuccessful

attack in 2006 posed by Islamic militants highlighted the dangers to Saudi Arabia’s

energy infrastructure. In that attack, the Abqaiq crude stabilization plant complex has

been a target because of its important role in producing the country’s crude oil and its

location at the hub of pipeline network.

Even though the Saudi government has been keen to improve security at its major oil

and gas facilities that hundreds of militants are arrested periodically, the terrorists have

never given up continuing mounting such attacks in the country. Such risks in property

loss of Saudi Arabia would have an adverse effect on the profitability.


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New competition

Although Saudi Arabia is holding a leading role in OPEC as well as the global energy

market because of its strong proven oil reserves and production capacity, it faces

increasing competition in the industry. Recently, OPEC recognized Venezuela as

having 296bn bbl reserves of crude oil based on its extra-heavy oil resources, more

than that of 265bn bbl in Saudi Arabia. As a result of the changes in current Saudi laws

and regulations regarding the existing companies’ activities or new entrants into the

industry, such competition may affect Saudi Arabia’s market share in the oil and gas

industry and thus impact its profitability in a negative way.

6. Suggestions6.1 Suggestions for Improving the Oil Industry in Saudi Arabia

We argued in our previous part that one weakness of business in Saudi Arabia is

that the Saudi Aramco controls about 100% of Saudi Arabia´s oil reserves and has

concentrated their oil reserves in only two oilfields. The dependences of Saudi Aramco

on these oilfields increase the business risk for the company. Our suggestion is to

diversify their activities more to decrease their business risk. One suggestion is to

develop its own global network of gas stations.

Saudi Aramco does not have the global network of gas stations like other

integrated oil companies, such as BP and Shell for example. Saudi Aramco only

focuses on the production of the crude oil. Saudi Aramco should take the advantage of

the production plants in other countries through joint ventures, by providing their own

gas stations. Our suggestion is to build its own network of gas stations. The benefit of

using their own name for the network of gas stations is that they can reach customers

without having to depend on intermediaries. First, this creates more brand recognition

by consumers. Second, this would also help the company to earn better margin

because they do not have to share their profits. Moreover, this means that Saudi

Aramco now has competitive disadvantages compared to its competitors. If Saudi

Arabia would like to expand their global market power, they need to help Saudi Aramco


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to build their global network of gas stations. This will give them their own channel to

distribute their own petrol. Furthermore, this could attract more high skilled labor if they

can achieve more brand awareness.

Another sector of the petroleum industry where Saudi Arabia has advantages is the

byproduct of petroleum, which is petrochemical. Having large petrochemical complex

will promise Saudi Arabia can increase the industrial development seeing as

petrochemical is the mother of the daily usage product.

Looking at the table above, we can see that the percent change in industry GDP

is predicted to be the same from 2012 to 2013 which is 3.7% Looking at this, Saudi

Arabia should invest more in the infrastructure to facilitate higher production of these

petrochemical products. Furthermore, this petrochemical industry is also correlated to

other industries, such as electronics and plastic-ware. By using their forecasted $263

billion reserves to invest in the infrastructure, they do not only upgrade the

petrochemical industry but also other correlated industry as well.

6.2 Suggestion for New Firms Entering Saudi Arabia

The previous research showed how the Saudi Aramco can improve theircompetitiveness in the global oil industry to further expand their market. However, they

will also need foreign inflows to further develop their country. This part of report is going

to look at why and how foreign firms can enter Saudi Arabia.


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Why? Saudi Arabia has one of the wor ld’s fastest growing countries. Their GDP per

capita income is forecasted to rise from $20,700 in 2007 to $33,500 by 2020. This does

not just promise high demand economies in a whole but also high purchasing power to

actually purchase the demanded the product. Saudi Arabia is also one of the world’s 25

largest economies at the 20th and the largest economy in the Middle East. Based on

World Bank’s easiness of doing business index, Saudi Arabia placed 22nd and 1st for

ease of registering property in 2012. Saudi Arabia has also the largest recipient of

Foreign Direct Investment in the Arab region which portrays high consumer confidence

of Saudi Arabia among other Middle East country.

How? With the recent found of oil reserves in Venezuela, Saudi Arabia has 2nd proven

largest oil reserves in the world which accounts for 20% of oil reserves worldwide.

However, it is not necessary for potential new firm to involve in petroleum industry. One

of the main industries that have high opportunity is the byproduct of the Petroleum

which is the petrochemical industry. Potential new foreign or local firm can indulge

themselves in lots of choices of product to be manufactured from the petrochemical

from pharmaceutical, cosmetics to plastic and rubber-made product.

7. Conclusion

To conclude, this research had come to two final verdicts. The first verdict is to further

improve the competitiveness of the oil industry in Saudi Arabia by having their own

retail gas station as well as expanding their petrochemical industry. Second verdict is

for the foreign companies to come into Saudi Arabia by establishing new firm through

green investment or merger and acquisition in the petrochemical industry as we found

that there are many opportunities in this industry. This verdict is a win-win situation for

both Saudi Arabia and potential investors or entrepreneurs coming into Saudi Arabian

market. Saudi Arabia can gain benefits such as corporate taxes, skill transfer, financial

inflow, infrastructure while the foreign firms can look at very promising expansion of

their business.


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8. References

Alyousef, Y., & Stevens, P. (2011) The cost of domestic energy prices to Saudi Arabia.Retrieved November 10, 2012, from Business Source Complete database.

Company profile Saudi Aramco, (2012, August 23). Retrieved October 22, 2012, fromBusiness Source Complete database.

Gately, D., Al-Yousef, N., & Al-Sheikh, H. H. (2012). The rapid growth of domestic oilconsumption in Saudi Arabia and the opportunity cost of oil exports foregone. RetrievedNovember 10, 2012, from Business Source Complete database.

Porter, M. E. (1990). The Competitive Advantage of Nations. Harvard Business Review

Powell, R., Walker, P. (2012, March 1). Saudi Arabia country report. Retrieved October18, 2012, from Business Source Complete database.

Saudi Arabia: Country analysis report –in-depth PESTLE insights, (2010) RetrievedOctober 18, 2012, from Business Source Complete database.

Saudi Arabia oil & gas report, (2012) Retrieved October 20, 2012, from BusinessSource Complete database.

country report saudi arabia a look into

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